Economy

Wage Recession Hits 5 Years; Worse Than Jobs Drought

As bad as the current job recovery has been — and it's by far the weakest since World War II — the recovery in wages has been far worse.

Five years after the recession began in December 2007, total wages in the economy have yet to fully recover in real terms, Commerce Department data show. In other words, the wage recession continues.

By comparison, the longest previous post-war wage recession, which began with the 2001 downturn, was over in 2-1/2 years, even though that jobs recession lasted four years.

In recoveries past, wage recessions have ended long before payrolls hit new highs. But in the current expansion, wages and employment are on the same slow track to recovery. Both remain about 2% below their old peaks.

Sixty months after the start of the 2001 recession, where we are now in the current cycle, wages were already nearly 8% above their prior peak, though payrolls were just 2% higher. A similar recovery would have boosted current wages by about $650 billion annually.

The early 1980s, marked by high inflation, saw real wages recover from one recession only to fall again before staging a more durable rebound. But the current wage recession has outlasted even that era of real wage stagnation.

The simplest explanation as to why wages have been so sluggish in this recovery is that the depth of job losses eroded employee bargaining power more than usual.

While it may not be true in all industries and specializations, the broad oversupply of labor means that workers have tended to feel fortunate to have a steady job, even without the gravy of pay hikes that outstrip inflation.

Another factor has been the underlying job shift since the end of 2007, with the bulk of the lingering losses in industries that tend to pay pretty well.

Compared to five years ago, there are 3.5 million fewer construction and manufacturing jobs and 1 million fewer jobs in financial services and government.

"Job quality is rapidly emerging as a second front in the struggling recovery," the National Employment Law Project, a low-wage worker advocacy group, concluded in a study in August. NELP found that lower-wage occupations accounted for 21% of the recession's job losses but 58% of the recovery's job gains.

By contrast, midwage occupations made up 60% of the job losses in the recession but just 22% of the jobs recovered in its aftermath.

While plenty of employers are awarding real pay increases, the tilt of the job market toward lower-paying work has meant aggregate wages, in real terms, are only growing as fast as net hiring.

Another factor at play may be a move toward more part-time work. The Labor Department reports that 7.8 million workers are holding part-time jobs because they can't find full-time ones, up from 4.6 million at the end of 2007, though down from a peak of 9.2 million in early 2010.

New data show that real average hourly earnings rose 0.6% in January from a year ago, but weekly earnings only rose at half that rate because workers clocked slightly shorter workweeks.

NELP noted in August that 1.7 million jobs added over the prior two years, or 43% of job gains, came in three generally low-paying industries: food services, retail and employment services.

Restaurants and retailers are bracing for ObamaCare's employer mandate that takes effect next year and already appear to have begun a shift to more part-time work ahead of a mid-2013 deadline. Fines of up to $3,000 per ObamaCare-subsidized worker won't apply for part-time workers, which the law defines as 30 hours per week.

Total employee compensation, including pension and health benefits, is roughly flat with its real level at the end of 2007. But it doesn't appear that the growth of fringe benefits is a key factor behind this recovery's prolonged wage recession vs. prior ones.

For example, although the 2001 job recession lasted four years, real compensation recovered after about a year in that cycle.